McKinsey Global Survey results:

What worked in cost cutting

and whats next
Companies were able to cut costs effectively through the crisis, executives say, but theyre less
confident of their ability to contain or continue to cut them. Some companies are positioning
themselves for longer-term success by planning the next round more strategically.
Executives say their companies have made effective and significant cutbacks in overall costs
since the onset of the economic downturn in September 2008, according to a recent McKinsey
survey.1 Even though cost containment remains a high priority, many respondents worry about
the sustainability of the cost reductions and are only somewhat confident that their companies are
adequately prepared for even bigger cost challenges, which they expect in the coming year. These are
among the findings of a survey of 300 operations and other senior executives from around the world.
We asked respondents about the size and scope of recent actions their organizations have taken to
reduce costs, the strategic motivations underpinning the moves, and executives views on the success
and sustainability of cost cuts. We also asked respondents to identify the most significant risks
facing their companies cost structures in the coming year and assess their confidence in the level of
1 

The online survey was in the field

in November 2009 and received
responses from 301 executives
from a full range of industries
and regions; 72 are operations
executives, and the remainder are
senior executives with other
functional specialties.

preparedness of their organizations to manage those risks.

While the results reflect a lingering environment of uncertainty and risk in the short term, they also
show that some companies are making important strategic moves in cost reductionamong them, a
focus on organizational effectiveness and capability buildingto position themselves advantageously
for the long haul.

Jean-Franois Martin

McKinsey Global Survey results

What worked in cost cuttingand whats next

A hard look at the bottom line

Even as moderate optimism about the global economy returns,2 cost cutting remains a top
priority for nearly three-quarters of all respondents to this survey. More than half say their
companies have cut up to 10 percent of overall costs since September 2008, nearly one-third say
their companies have reduced costs by 11 percent to 20 percent, and 9 percent of executives report
cutbacks of 20 percent or more.

2 

See, for example, Economic

Conditions Snapshot, December
2009: McKinsey Global Survey
results, mckinseyquarterly.com,
December 2009.

More than half of all respondents say the cost-cutting programs undertaken by their companies
since September 2008 were targeted at labor, with overhead labor accounting for the lions share of
labor cost
reductions. Forty percent of executives say they cut costs in all categories: frontline and
Survey
2010
overhead
labor,
nonlabor, and capital assets (Exhibit 1).
Service ops
Exhibit 1 of 6
Glance:
Exhibit title: Cuts everywhere

Exhibit 1

Cuts everywhere
Actions taken to reduce costs since Sept 2008, % of respondents,1 n = 301
Cost reduction focused on . . .
Nonlabor costs (eg, purchased goods
and services, travel)

48
36

Overhead labor (eg, finance, HR, IT)

Capital assets (eg, facilities,
transport assets)

1 Respondents

20

who answered other are not shown.

20

Frontline labor

40

All of the above

No actions to reduce costs

McKinsey Global Survey results

What worked in cost cuttingand whats next

The predominant motivation for cost reduction of any kind was to lower variable costs in response to
lower demand (Exhibit 2). Nevertheless, a large proportion of respondents note that company-wideimprovement programssuch as lean or Six Sigmawere strong motivators as well. This finding
suggests that many companies have an interest in making long-term, transformative changes to their
cost structures.
On strategy, just over half of all respondents say their companies took a targeted approach (focusing
on a particular geography or function), whereas 44 percent say their companies approach
was an across-the-board cost reduction. Large companiesthose with annual revenues of more than

Survey 2010
$1 billionand public companies were far more likely than their smaller or privately owned peers
Service ops
to take an across-the-board approach.
Exhibit 2 of 6
Glance:
Exhibit title: Why cut?
Exhibit 2

Why cut?
% of respondents whose companies have taken action to reduce costs since Sept 20081

Top 3 reasons for action taken

Actions taken

What motivated your company

to take a particular action?

Cost reduction
focused on frontline
labor, n = 165

Reduce variable costs in line with lower

demand/volume for our products/services

59

Company-wide program to increase

performance (eg, lean, Six Sigma)

25

Organization restructuring (eg, globalization

or product-based organization)

24

New organizational leadership (eg, new

business or functional leader)

24

New performance goals (eg, stock price margin)

18

New strategy (eg, entering new markets)

16

Merger, acquisition, other change of ownership

1 Respondents

12
9

who answered other or dont know are not shown.

31

40

29

33

33
46

41

27

29
20

18

21

16
17

26
10

35

21

15

13
12

42

37

37

15

Cost reduction
focused on capital
assets, n = 175

50

45

30

Free up cash/reduce need for short-term

external financing

Cost reduction
focused on nonlabor
costs, n = 259

50

42

Part of normal budget cycle

External shock (eg, commodity or raw-material

price impact)

Cost reduction
focused on overhead
labor, n = 217

14
13

McKinsey Global Survey results

What worked in cost cuttingand whats next

Where did cutbacks occur? Among respondents whose companies took a targeted approach to
cutbacks, a full 75 percent say their organizations trimmed costs in operations, and nearly half cite
HRthe next most frequently chosen option (Exhibit 3). No area was spared, however: cuts were
widely distributed across business units, geographies, and regions. Indeed, 9 percent of executives

Survey
2010
say their companies cut everywhere.
Service ops
Exhibit 3 of 6
Glance:
Exhibit title: Where the cuts are

Exhibit 3

Where the cuts are

% of respondents whose companies have taken a targeted approach to cost cutting,1 n = 161
Parts of the business where companies cut costs
Operations

75

HR, communications, external

relations, and/or legal

47

In individual business units (eg,

made cost-cutting decisions for each
business unit separately)

38

In individual geographies (eg, costcutting decisions were made separately

for each location)

26

Across multiple business units (eg, cut the

same % across business units)

15

R&D

13

Marketing and sales

33

Across multiple branches, facilities, or plants

(eg, cut the same % across locations)

IT

32

Across multiple geographies (eg, cut the

same % across locations)

In individual branches, facilities, or

plants (eg, cost-cutting decisions were
made separately for each location)

31

All of the above

Finance

29

1 Respondents

who answered dont know are not shown.

McKinsey Global Survey results

What worked in cost cuttingand whats next

Making cuts stick?

Regardless of where or why companies trimmed costs, the majority of respondents say those
moves were effective, and two-thirds say their companies met the cost reduction targets theyd set.
Broadly, executives who say their companies were effective tend to credit those factors associated
with basic tenets of good management. For instance, the top two factors cited by respondents as
being responsible for successfully meeting their cost reduction goals are top-management support
and clear targets (Exhibit 4). Among the minority of executives who say their companies cost cuts
were ineffective, the top barriers cited are a deteriorating economy, a lack of accountability, and an
insufficient
Survey
2010fact base to make decisions.
Service ops
Exhibit 4 of 6
Glance:
Exhibit title: Top factors for meeting targets

Exhibit 4

Top factors for meeting targets

% of respondents whose companies have met their cost reduction strategies,1 n = 178
Top two factors most responsible for companies meeting cost targets or goals
Top-management support

44

Clear targets

39

Clear, well-planned approach

31

Necessary talent and

capabilities in place

22
19

Sufficient accountability
Fact base necessary to
make decisions

1 Respondents

15

who answered dont know are not shown.

Sufficient communication

Less than expected impact

of financial crisis

Sufficient investment in critical

functional capabilities

Support from unions

Necessary incentives in place

Supportive regulations

McKinsey Global Survey results

What worked in cost cuttingand whats next

While the majority of executives say the cuts will be sustainable over the next 12 to 18 months
(particularly in North America, where nearly two-thirds agree), a sizable minority believe otherwise.
Fully four in ten say that at least some proportion of the costs their companies cut since September
2008 will return.
Notably, executives who doubt that the cuts are sustainable are more likely to work for companies
that took an across-the-board approach to cost cutting. By contrast, executives who predict
that their companies cuts are sustainable over the next 18 months are more likely to say their
3 

See, for instance, R&D in the

downturn: McKinsey Global
Survey Results,
mckinseyquarterly.com, April
2009; and IT in the new normal:
McKinsey Global Survey results,
mckinseyquarterly.com,
December 2009.
4 
In a recent survey, we found that
49 percent of respondents expect
demand to increase by the end of
the first quarter of 2010, while
19 percent say an upturn has
already begun and an additional
7 percent think the upturn will
begin by the end of the year. For
more, see Economic Conditions
Snapshot, December 2009:
McKinsey Global Survey results,
mckinseyquarterly.com,
December 2009.

companies chose a targeted approach.

Further, respondents who think cutbacks will be sustainable are more likely to say their companies
focused cuts on operations and less likely to have targeted marketing, IT, and R&D. This
perhaps reflects a view among executives that is also seen in other surveys: that functions such as
R&D, marketing, and IT are critical drivers of growth and, to some extent, must grow or shrink
in line with demand.3
Finally, two-thirds of the respondents who expect some proportion of costs to return in the coming
12 to 18 months cite rising demand and volumes as the cause. (A full 20 percent say demand has
already returned to pre-crisis levels, a response consistent with other surveys. 4) Other causes
of returning costs include the investments required because of a companys strategic direction
(35 percent of executives) and changes in strategy (19 percent). By contrast, only 12 percent of
respondents expect costs to return because their companies have no clear approach to limit them.

McKinsey Global Survey results

What worked in cost cuttingand whats next

A risky future

Executives express misgivings when it comes to the ability of their organizations to weather the risks
they perceive as most relevant to their corporate cost structures in the coming months. Chief among
these risks is continued sluggishness or decline in demand (Exhibit 5), for which only one-quarter of
respondents say their companies are extremely prepared or very prepared. Meanwhile, 37 percent
of respondents
Survey
2010 say their companies are slightly prepared or not at all prepared for decreased
quality or
Service
opsservice effectiveness resulting from past cost reductions.
Exhibit 5 of 6
Glance:
Exhibit title: Concern about demand levels
Exhibit 5

Concerns about demand levels

% of respondents,1 n = 301
Biggest risks to companys cost structure in next 1218 months
Continued sluggishness or decline
in demand or volume

40

Decrease in effectiveness as a result

of past cost reductions

26

14

Increase in benefits costs

Predicted or planned increases
in capacity

11

Increase in cost of commodities

20

Industry consolidation creating

new scale economies

11

Suitability of available talent

20

Increase in selling, general, and

administrative costs

10

New business models as a result

of new low-cost competitors
1 Respondents

18

Labor negotiations

who answered other or dont know are not shown.

Executives in North America, compared with their

counterparts in Europe, are four times likelier to cite increasing
employee-benefits costs as a risk.

McKinsey Global Survey results

What worked in cost cuttingand whats next

However, the importance of mastering cost-related risks will persist, as nearly three-quarters of
survey respondents say cost containment or cost reduction will be among their companies top three
priorities over the next 12 to 18 months. Therefore, it is notable that some companies appear to be
reacting to the pressures of the post-downturn economy by planning operational changes that could
reduce their cost structures for years to come (Exhibit 6).
For example, more than half of all respondents say their organizations plan to lower nonlabor costs
through the use of strategic sourcing or procurement effectiveness initiatives. Likewise, more than
40 percent of executives report that their organizations will reduce frontline labor costs by using

Survey 2010
lean-operating principlesa significant proportion, compared with the 20 percent of respondents in
Service ops
this survey who say their companies have focused on frontline cost reduction since September 2008.
Exhibit 6 of 6
Glance:
Exhibit title: Reducing companies cost structures

Exhibit 6

Reducing companies cost structures

% of respondents,1 n = 301

Looking ahead at the next 12 to 18 months, which, if any, of the following

actions is your company considering to reduce costs?
Nonlabor reduction through strategic
sourcing/procurement effectiveness

54

Frontline labor reduction through

lean operations

44

Outsourcing or offshoring
Overhead labor reduction based on a
program such as activity value analysis
(AVA) or process redesign
Overhead labor reduction based on volume
or a top-down percentage target
1 Respondents

38

30

Frontline labor reduction based

on cuts in volume

18

Other nonlabor reduction

19

Other overhead labor reduction

18

Other frontline labor reduction

28

who answered dont know are not shown.

Executives in Europe are more likely than those elsewhere

to say their companies are planning offshoring or outsourcing activities
in the next 12 to 18 months.

McKinsey Global Survey results

What worked in cost cuttingand whats next

In our experience, in order for strategic sourcing and lean to work, they require big cultural changes
and long-term organizational commitment. Therefore, its appropriate that 57 percent of all
executives say their companies will focus on organizational effectiveness, including talent and capability building, as an operational priority in the coming months (39 percent of respondents
say their companies will focus on productivity growth, the same proportion of executives who say
their companies will focus on service improvement). Indeed, 21 percent of respondents cite
frontline talent and culture as the single area where improvement would fundamentally lower their
companies cost structuressecond only to fixed-cost burden, cited by 23 percent of respondents.
Notably, executives who describe their companies past approach to cost cutting as both targeted and
sustainable are even likelier to be focusing on organizational effectiveness than are other executives,
suggesting they may be in position to further extend their cost advantages.
Looking ahead

Companies often employ an across-the-board approach to cost reduction because it is fast,

relatively easy, and appears fair to business units and other stakeholders. Nonetheless, our
experience and the results of this survey suggest that a differentiated approach is both more
effective and more likely to be sustainable.
In the coming months, a substantial number of companies plan to tackle perennially hard-toreach cost areas, among them fixed-cost structures and product or service specifications. In our
experience, securing large and sustainable improvements in such areas requires companies to be
willing to make significant changes to how products and services are designed and deliveredand
to develop a more sophisticated understanding of how customers perceive the value of product and
service features.
As companies seek to extend their cost reduction efforts further into the front line, they will likely
find bigger rewardsand bigger challenges. Encouragingly, a majority of companies are focusing
on organizational factors such as talent and capability in the coming months. In our experience,
companies that fail to place a high priority on softer, organizational issues risk handcuffing their
ability to make operational changes stick.
Contributors to the development and analysis of this survey include Kevin Dolan and Michael
Murray, an associate principal and principal, respectively, in McKinseys Chicago office,

and Kelly Duffin, a consultant in the Toronto office. Copyright 2010 McKinsey & Company.
All rights reserved.